x Abu Dhabi, UAEMonday 24 July 2017

What goes up may well crash down

Comment The best year for stocks on record? This may puzzle anyone who has been following the global economy and its prospects for growth.

The best year for stocks on record? This may puzzle anyone who has been following the global economy and its prospects for growth. Let's recap: the global economy has narrowly emerged from the worst downturn since the Second World War and economists, who rarely agree on much, agree that it is in for a long slog that will yield little in the way of new jobs. In fact, one of the best predictions for this year seems to be that the world's largest economy, the US, could be back in a recession by summer.

And yet the broadest gauges of global stocks have climbed 30 per cent this year. Emerging markets have done even better. An investor who put money into the stocks making up Istanbul's benchmark index would today have doubled their money. Jakarta's stocks have soared 123 per cent. Brazil's benchmark has rewarded investors with a mouth-watering 143 per cent return. The only emerging markets seemingly forgotten by the rally were here in the Gulf, where Dubai's paltry 10 per cent gain looks good only when compared with Kuwait, where stocks fell 13 per cent, and Bahrain, down 19 per cent.

What gives? Obviously, developing economies were in most cases less affected by the crisis than the US, the UK and Europe. And like small, developing economies, it takes less money to produce larger increases in profit. But economists warn that the rally in global markets is like an athlete on steroids. Record low US interest rates rekindled the wave of money that coursed through emerging markets before the crisis, and so stock markets are rising faster, they warn, than corporate profits.

If and when profits reflect this, stock prices could come crashing back to earth. The rally is also a stark reminder that, while the economic outlook can influence stocks and stock prices can influence the economy, they are not the same thing. And like the economist John Maynard Keynes sagely advised, markets can be irrational longer than you can remain solvent. @Email:warnold@thenational.ae